If you’re shopping for the lowest refinance rates from today’s best lenders you may have noticed that quotes are listed by Annual Percentage Rate. APR was intended to help homeowners pick the least expensive home loan factoring in interest rates and closing costs. Should you trust APR when shopping for a home loan or will choosing the lowest ARP get you the highest out-of-pocket expenses?
What is Mortgage APR Anyway?
Lawmakers intended for Annual Percentage Rate to help you shop for the least expensive mortgage loan. Unfortunately APR is a dismal failure and you should never use it to shop for refinance rates. Let me say that again…NEVER USE APR WHEN SHOPPING FOR MORTGAGE RATES.
Annual Percentage Rate is the single most manipulated marketing tool used by lenders to sell you an overpriced home loan.
Annual Percentage Rate is a government concocted formula designed to show you the true cost of your mortgage loan. Basically you take your loan amount less closing costs factoring in your payments for the duration of the home loan to calculate APR. Most lenders quote mortgage rates alongside APR highlighting their Annual Percentage Rate.
It’s not uncommon to find refinance rates that include an APR lower than the interest rate. Lenders love to advertise their low APR home loans pushing higher closing costs on unknowing borrowers.
How Annual Percentage Rate Falls Short
The formula lenders use to calculate their Annual Percentage Rates makes a number of faulty assumptions.
- APR Assumes You’ll Keep Your Mortgage For 30 Years
- APR Assumes You’ll Never Pay Extra or Make Bi-Weekly Payments
- APR Assumes You’ll Never Refinance
Another problem with the Annual Percentage Rate is the way lenders factor in discount points. Points raise your out-of-pocket expenses as a way of buying down your mortgage rates. While discount points lower your refinance rates and payment amount they raise your out-of-pocket expenses at closing.
Lower refinance rates and payments from paying discount points creates an artificially lower Annual Percentage Rate meaning you’re getting the most expensive closing costs with that “low, low APR.”
If you’re inadvertently paying too much at closing you’re not going to be able to recoup your out-of-pocket expenses, including any unnecessary discount points, meaning you’re going to be losing money no matter how low your refinance rates.
How to Shop For The Lowest Refinance Rates
The best way to shop for a new home loan is to compare interest rates and fees on quotes that do not include discount points. This can be tricky because lenders cook up different names for many of their fees just to confuse rate shoppers. What is the most commonly overpaid fee among refinancing homeowners?
The mortgage loan origination fee is one of the most overpaid and easily negotiated fees you’ll pay at closing. Pay less for your origination fee while avoiding mortgage lender junk fees and you’ll get the maximum benefit from today’s low refinance rates.
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